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For Investors, Puerto Rico Is a Fantasy Blank Slate

March 9, 2018

Puerto Rico is open for business. So declared leaders from the devastated island on February 15 at an investors’ conference convened to explore the opportunities generated by what was described as “the greatest disaster in US modern history.” The event, in New York City, was organized by the Financial Times and Puerto Rico’s Department of Economic Development and Commerce, and it featured Governor Ricardo Rosselló Nevares and several members of his cabinet, who addressed a room of corporate investors eager to learn about the role they could play in Puerto Rico’s economic future. With sleek PowerPoint presentations and relentless optimism, government figures described the post-hurricane context not as a humanitarian crisis but as a chance for a “restart,” declaring almost giddily that they could now accomplish in just a few years what would have otherwise taken a decade.

The governor and his team stressed that their approach to the recovery was not a departure, but merely an acceleration of the austerity policies developed to address the preexisting financial crisis. They pointed to the labor-reform law passed months before Hurricane Maria as a sign of the administration’s commitment to creating a business-friendly environment. The legislation stripped benefits for workers, reduced sick leave, increased probationary periods, facilitated layoffs, and lowered wages. Yet one of the entrepreneurs present at the conference, Cyril Meduña, suggested that the measures had not gone far enough and that more could be done in the wake of the storm, “now that there is more mobility.” In other words, with so many Puerto Ricans leaving because of the slow recovery, lack of aid, and massive unemployment, the time might be right to further erode labor protections.

Rosselló declared that the new economic plan for Puerto Rico focused not just on financial policies but on broader social and demographic transformations. He discussed the recently announced education reform, pending health-care revisions, and reduced allocations to municipalities and the public university system as part of the government’s efforts at “right-sizing” itself to create better conditions for investments. “Even before the storms we saw opportunities,” Rosselló said, “but now we have a blank canvas where we can start thinking anew, where we can take bold steps into investment and innovation and rebuild Puerto Rico much more effectively.”

Key to Rosselló’s imagined demographic shifts, one might assume, is the historic migration of Puerto Ricans to the US mainland, which was well underway long before Hurricanes Irma and Maria struck. Since the storms, not only has the government done little to quell the wave of departures, it has sought to take advantage of the new diaspora in the midterm elections by mobilizing stateside Puerto Ricans against US politicians who voted in favor of the bill that would raise taxes on Puerto Rico–based companies. For the Puerto Rican government the growing diaspora offers political leverage but also an escape valve: The mismanagement of funds and inexplicable delays in restoring public services surely would have been subject to greater scrutiny if not for the fact that so many have left.

While the local population continues to dwindle, Rosselló’s government is courting new “stakeholders” to come to Puerto Rico under Act 20/22, a pivotal piece of legislation that allows wealthy transplants to use the territory as a tax haven. Passed in 2012, Act 20/22 was established to bring capital investment to the island amid fiscal crisis. The law originally carried certain restrictions requiring direct capital investment and job creation. Under the current administration, however, these rules have been lifted. Now, any individual who spends half the year on the island can receive exemptions from federal and local taxes, capital gains tax, and taxes on passive income until the year 2035, regardless of whether they generate employment or invest in the local economy.

Originally designed to attract wealthy financiers, the law has ended up luring tech entrepreneurs, cryptocurrency devotees, digital nomads, and tax dodgers who choose their countries of residence based on economic incentives, regulatory freedom, and “value opportunities”—rather than on cultural or political ties. Puerto Rico’s status as an unincorporated US territory suits these untethered entrepreneurs. As neither a nation nor a US state, it allows arrivals to retain their US citizenship while benefiting from the legal ambiguities of territorial status.

Although most presenters at the conference—government and business leaders alike—declared their support (at least in theory) for Puerto Rico’s becoming a US state, it is clear that for those leading Puerto Rico’s recovery the current political status is not a target of change but a source of opportunity. The presenters consistently emphasized what have traditionally been the main selling points of Puerto Rico for investors: the possibility of operating in a US jurisdiction without paying US wages or US taxes. Manuel Laboy, the secretary of the Department of Economic Development and Commerce, proudly pointed out that since Puerto Rico is not a state, investors can take advantage of “competitive wages” that are on average 30 to 50 percent lower than those of the mainland United States, while still being able to stamp their products with the label “Made in the USA.”

Puerto Rico’s colonial status after the hurricane now offers two new seductions: the promise of federally funded contracts and the fantasy of a “blank slate” for innovation. As Laboy underscored at the conference, the recent allocation of $75 billion by the US government represents three times the island’s annual budget, thus allowing for broad-scale social and economic transformation.

It is not coincidental that one of the first measures passed by the Rosselló administration after Hurricane Maria was to allow unsolicited contracts by private investors. Government leaders bluntly declared that this reflected their intent to let private investors dictate the terms of the recovery. As explained by Omar Marrero, the executive director of Puerto Rico Public-Private Partnerships Authority, “It’s time for the government to no longer tell you where we want to invest and how we’re going to modernize our infrastructure. No. It’s time to let the people, the people of the private sector, the innovation, the expertise of the private sector, tell us what projects would not only modernize our infrastructure but also restore the investment needed.”

The main vehicle for these investments will be Public Private Partnerships, or P3s. As previously reported by The Nation, P3s are the Trump administration’s preferred vehicle for developing public infrastructure. They are promoted through the promise of improved services and greater efficiency, though this is often achieved through cost-cutting measures and layoffs. (Ironically, it was precisely such cost-saving measures which left Puerto Rico’s electric service vulnerable to disaster.)

Long before Hurricane Maria struck, Puerto Rico already had a disproportionate number of P3s. Airports, toll bridges, and convention centers had already been, in the words of the governor, “externalized.” Over the course of the last decade, while the public debt mounted, many public assets and services fell into disrepair. The PROMESA bill, which was enacted by the US Congress to deal with the debt crisis, paved the way for these government assets to be sold, or simply handed over, to private industry to repair, operate, and manage. Since the storms hit in September, the government seems determined to privatize not only what was destroyed by the hurricanes, but also all that had been neglected in the previous decades. This includes streetlight systems, water distribution, public transportation, waste management, and health and education services—to name a few.

P3s are attractive to investors because, unlike municipal bonds, they allow the private sector to not just invest in but actually engineer public infrastructure. This means that the development projects that will be prioritized in the wake of Maria will not necessarily be those most needed by storm-ravaged communities, but rather those promising the greatest returns for investors.

The possibility of reshaping infrastructure on a shattered island, combined with the particularities of Puerto Rico’s ambiguous legal status, holds powerful appeal for those involved with financial technologies such as Bitcoin and blockchain. According to J. Robert Collins Jr., the CEO of financial-tech startup Renovatio PR, being in a US territory, as opposed to a state, provides “the flexibility of operating territorially.” He suggested that whereas in the United States there are “legacy laws” and structures that restrain technological development, in Puerto Rico there were no such restrictions. Newly arrived entrepreneurs could thus help shape regulation on the island, which in turn might set new precedents worldwide.

The local government has made it clear that blockchain technology, if not the cryptocurrencies it empowers, will be at the center of disaster recovery. It is uncertain what this might mean, but one likely possibility is that blockchain could be used to digitize outdated government systems and services. For example, blockchain technology could be used to facilitate the issuance of ID cards, driver’s licenses, and birth certificates, and to keep track of notary records and property titles. It was hinted at the conference that a blockchain-powered system could be used to manage donations, federal funds, and monitor government contracts. One of the selling points of blockchain ledger technologies for these functions is its purported transparency and accuracy—something that would certainly be appealing to a government with an image crisis that is now poised to handle billions of dollars in federal aid.

A less discussed aspect of blockchain is its implications for energy redistribution. Blockchain is increasingly billed as a “disruptive” technology that can transform the distribution of renewable energy. While current solar-panel users can sell their excess energy back to utility companies, blockchain technologies would allow users to sell energy directly to their neighbors, allowing for the creation of decentralized microgrids. Although there have been few test cases, many herald this innovation as a way toward a more affordable and accessible renewable future.

Within the United States these systems have been hard to implement, partly because they challenge the economic interests of large, centralized utility companies. In Puerto Rico, where the governor has already declared that the central power authority will be broken up and sold for parts, there is thus a unique opportunity to reimagine power generation from the ground up. In the rural parts of the island—where electric restoration has been particularly slow—the government could make a case for forgoing the restoration of central power lines altogether in favor of decentralized microgrids. The cost of these systems is still prohibitive in many parts of the United States, but as Roselló emphasized in his remarks, Puerto Rico’s current price point for energy services is so high that there is ample room to innovate while still securing a hefty profit.

Puerto Ricans, who have now spent over five months without electricity, might very well become the guinea pigs for these new systems of decentralized energy. It is unclear, however, if these systems will be reliable or what their lifespan and long-term implications might be. Moreover, anyone with even a passing knowledge of Puerto Rico’s history as a site of both social and biomedical experimentation will be concerned about the territory’s becoming a laboratory for new technology.

Overall, it appears that the current administration in Puerto Rico subscribes to the adage that there is no such thing as bad publicity. Rather than being concerned about the negative headlines of the past five months—which have brought mainstream attention to the devastation and hardships produced by the hurricane and to the botched recovery—the government appears pleased that now a greater number of US residents are aware of Puerto Rico’s “unique relationship” with the United States. One might do well to remember that negative press is not necessarily viewed by investors as a cause for concern. Indeed, the conference moderators hinted as much when they unabashedly brought the event to a close by reminding attendees of the famous dictum: “The time to buy is when there is blood in the streets.”